The campaign follows concerns that some employees received less support than others because of the way their workplace pension scheme processed tax relief. The issue affects people who were automatically enrolled into pensions but earned below the income tax threshold, meaning they could not benefit from one of the available tax relief methods.
Why Some Workers Missed Out on Pension Tax Relief
The issue comes from the difference between two systems used to provide pension tax relief: Relief At Source and Net Pay Arrangement. According to FT Adviser, workers using the Relief At Source system have their pension contributions taken from their income after tax, with HMRC adding basic-rate tax relief directly into the pension pot.
For example, a worker making an £80 contribution through this system receives a £20 addition from HMRC. This process applies even when someone earns too little to pay income tax.
The Net Pay Arrangement works differently. Contributions are taken before tax is calculated, reducing taxable income. For employees who pay income tax, this can produce the same result because their tax bill is reduced. The problem affects lower earners who do not have an income tax bill to reduce.
Employees can be automatically enrolled into workplace pensions if they earn £10,000 or more, while the personal allowance, the point at which people start paying income tax, is £12,570. According to LCP, this difference meant some non-taxpaying workers in Net Pay schemes missed out on pension tax relief that others received through different arrangements. Around three quarters of the affected workers are believed to be women, with the total number of people affected estimated at around one million.
HMRC Campaign Aims to Return Missed Payments
HMRC is contacting eligible workers to encourage them to apply for a low earner’s pension payment. According to HMRC’s Pension Schemes Newsletter, payments are expected to begin being made in the coming months as claims are submitted, with letters being sent gradually until early 2027.
The amount each person receives will depend on their individual pension contributions. A 2021 government consultation estimated that the average payment could be around £53, although the final figure will vary between workers. Once people have registered for the initial payment linked to the 2024/25 tax year, HMRC plans to introduce a more automated process for future years where the same issue applies.
Former pensions minister Steve Webb, now a partner at pension consultants LCP, warned that many people may not recognise the letters as genuine. According to Webb, some recipients may be suspicious of an unexpected message from HMRC offering money and could believe it is a scam.
He said the process of reaching the affected workers would be difficult and that effective communication would be needed to ensure people receive the payments they are entitled to. The campaign is intended to address the gap created by the interaction between pension rules and income thresholds, allowing eligible low earners to claim support they previously missed.
